Would you refuse free money? Hope for the euro.

PublishedJune 28, 2012

Let’s say that you work in a department of four people. I’m your manager. Our group has done an especially good job on a major project. As a result, my boss has awarded me $10,000 to give bonuses to each of my employees. She says to me, “Distribute it however you think is fair.”

Not wanting to make a real decision, I simply divide the pot into four equal parts and give each of you $2,500. That seems “fair”, doesn’t it? Well, not to you. You think you did much more work and contributed much more value to the project than your three colleagues. You believe you deserve more (perhaps much more) than $2,500.

This can be a real motivational issue and a major team-building problem. But, bottom line, would you turn down the $2,500 because you thought I was being unfair? If you’re like most people, you’d still take the money – it enhances your situation even if you feel badly about it. It’s just practical.

What does this have to do with the euro? The argument – at least from Germany’s perspective – is between practicality and fairness. Many Germans believe that the south European countries have been irresponsible – they’ve avoided taxes, broken promises, and spent without thought for the future. (Whether this view is “fair” or not will be debated for many years). Since the south Europeans have behaved irresponsibly, it’s “unfair” to force Germany to bail them out.

Putting fairness aside for a moment, the practical reality is that it will cost Germany more (perhaps a whole lot more) to not bail out their southern friends. In fact, there’s a good chance that a breakup would turn into a runaway catastrophe.

So, what does Germany do? My guess is that they’ll demand concessions – to avoid the moral hazard of bailing out unreformed economies – but will ultimately steer toward a practical solution. In other words, they’ll pay up because it’s in their best interest to do so — even if they feel badly about it. It’s practical.